January 2021

We’ve grown accustomed to a regular diet of bad news in recent years, and how negative headlines have wreaked havoc on stock markets. But investors should feel encouraged that stock markets often bounce back far sooner than you might expect.

Anyone who expected 2021 to begin in a more positive and optimistic fashion has probably been brought crashing back down to earth after the events of the year so far. But while the world is full of worries at the moment, it’s important to remember that the investment world approaches things very differently. In fact, stock markets have a long history of recovering strongly after big shocks, which makes it even more important for investors to hold their nerve during tough times.

‘Climbing the wall of worry’

Climbing the wall of worry was an investment phrase that originated in the 1950s. It means that during periods of economic or financial shock or stress, investors will continue to trade, and stock markets will keep rising as a result. The history books tell us that global stock markets have not only managed to survive negative events but have ultimately thrived.

However, what’s noticeably different now compared to previous periods of crisis is the shorter timeframe it takes for stock markets to absorb shocks and regain their composure again. This is due, in a large part, to the determination of governments and central bankers to take significant steps to prevent a crisis from turning into a depression.

The Wall Street Crash

The ‘Great Depression’ that took place during the 1930s began with the Wall Street Crash in October 1929. Throughout the 1920s, US stock markets enjoyed rapid expansion, but this started to slow down markedly towards the end of the decade. As production began to fall back, unemployment started to rise, and prices began falling. On 29 October 1929, the Dow Jones stock market fell 12%. But the aftershocks of ‘Black Tuesday’ continued to be felt for years after. By 1933, unemployment in the US had risen to 25% of the total workforce.

The lessons learned from the Wall Street Crash – and the Great Depression that followed – remain applicable today: the best way to stave off years of economic depression and hardship for millions is to provide emergency measures designed to stimulate the economy, prevent mass unemployment, and keep things moving. Even so, despite US President Franklin Roosevelt launching the historic ‘New Deal’ stimulus measures, it took stock markets a full 25 years before they returned to their pre-crash peak.

Black Monday

The experience gained after the Wall Street Crash managed to help stock markets to recover from the ‘Black Monday’ crash that took place in October 1987. This time, a number of events – such as the slowdown of the US economy, oil price fears, and automatic selling from newly computerised trading systems – converged to create an overwhelming sense of panic among investors. Back then, using computers to conduct large scale stock market trades was a relatively new concept, and the rules that meant systems would sell stocks when they fell to specified levels created a “death spiral” of selling. By the end of the day, 22% had been wiped off the value of the Dow Jones, and stock markets across the world were also badly affected.

Even so, this time the stock market recovered very quickly, boosted by the decision taken by central banks to reduce interest rates to help keep money circulating in the financial system. Investors soon regained their appetite, and just five years later (and after some measures were introduced to prevent a repeat of the computerised selling) stock markets were rising again by around 15% per year.

The tech bubble

The next big test for investors came with the commercialisation of the Internet in the 1990s, which led to the dramatic ‘dotcom’ boom and bust at the turn of the century. Back then, investors were almost euphoric about the possibilities of internet-based companies, and the value of shares in vastly-hyped companies – most of which had never made a profit – reached ridiculous levels.

This time, central bankers had tried to intervene and rein-in excessive speculation in tech companies by raising interest rates – the US Federal Reserve raised rates three times in 1999 and twice more early in 2000. But there was little they could do to prevent the dotcom mania. In March 2000, the bubble began to burst. The Nasdaq index that lists US tech companies fell by more than 20%, and by October 2002, the Nasdaq was down 80% from its March 2000 peak. This meant that trillions of dollars in paper wealth disappeared almost overnight. It took another 13 years before the Nasdaq fully recovered to surpass its previous high point.

Global Financial Crisis

But the biggest test for investment markets, the broader impacts of which are still being felt many years later, came with the ‘Global Financial Crisis’ of 2007/2008. This time, stock market crashes became a full-blown economic crisis after the collapse (and subsequent rescue) of banks that had invested in bad loans and toxic assets – it created shockwaves throughout the world. According to the International Monetary Fund, large US and European banks lost more than one trillion dollars, forcing bailouts that would lead to economic austerity for a decade.

In the UK, the FTSE 100 fell 31% in 2008. In the following year, UK gross domestic product (GDP) shrunk to -4.2%, and the unemployment rate rose to 7.9%, before reaching an all-time high of 8.1% in 2011. Perhaps you may recall this difficult period. But while the negative effects of the Global Financial Crisis lived on for many years, investment markets recovered quickly. The Bank of England acted decisively to lower interest rates to record levels and offered previously unheard-of levels of financial support. The measures worked, and in 2009, the FTSE 100 recovered by 22%.

The COVID pandemic

A similar pattern – crisis followed by rapid recovery – has taken place since the coronavirus pandemic caused economies across the world to enter hibernation in the early months of 2020. The initial shock prompted panic selling among investors. Global equity markets fell more than 35% in March 2020 and falls continued throughout April. But investors regained their composure when it became clear that governments and central banks would act to do whatever it took to prevent another Great Depression.

Another important factor was also noticeable during the early months of the pandemic. The reality is that companies are adept at adapting and evolving, and entrepreneurship is about thriving in testing times. Investors were, therefore, able to identify those companies that would do well during lockdown, tech companies for example, and these companies performed well throughout 2020.

What should investors do?

Let’s be clear – we’re still in the middle of the global pandemic, so it’s too early to chalk this one up to experience. And while it’s important to recognise that investment markets have shown great resilience in recovering so quickly, there’s clearly a disconnect between the performance of companies and the economic hardship that so many people faced during 2020 and are still likely to face in the months – perhaps years – ahead.

But from an investment perspective, it’s encouraging for our investors to feel reassured that negative economic and life circumstances don’t necessarily lead to negative returns. As history tells us, equities have always been a volatile investment, but that definitely does not mean they are a bad investment. People often make the mistake of selling when markets fall heavily, and only start investing again when markets have rebounded. But even during times of crisis, when people have experienced dramatic falls in the value of their investments, we’ve seen time and again that those losses can be recovered within a few years, provided you stay the course. Because the longer you remain invested, the more likely you are to make a gain.

There’s no doubt that the current climate remains a difficult one for investors. But decade after decade, the market has demonstrated its ability to climb the ‘wall of worry’ and to focus on finding investments with a good chance of future success. That’s as true now as it has always been.

If you are interested in discussing your financial plan or investment strategy with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice.

After a traumatic 2020 for dividend-paying companies, when a number of traditional stalwarts were forced to cut or suspend their dividends, we look at whether we can expect a return to dividend payments in the year ahead.

Why are dividends important?

UK investors have always had a love-affair with dividend-paying companies. For example, many retirees invest in companies known for their dividend payments because they can be relied on to pay a consistent and strong level of income, year in, year out.

But it is not just the man in the street who is attracted to income-paying companies. Most pension funds own large quantities of dividend payers for the same reasons. One of the reasons the FTSE 100 index has been historically popular with investors is that its average dividend yield is usually between 4% and 4.5%. During an extended period of low interest rates, this makes dividend-paying companies very attractive within any investment portfolio.

What’s more, earning a regular income through dividend-paying companies can help you to grow the value of your investment pot significantly over the years, especially if you use the income payments to purchase additional shares – which in turn also pay out future dividends.

So, it is no surprise that investing for dividends is important to UK investors, and no coincidence that the UK has long stood out as offering a higher dividend yield (how much a company pays out compared to its stock price) than most other countries.

A difficult period for companies

Dividends are usually considered to be a good sign that a company is doing well, and has plenty of spare cash in the bank. But the UK’s reputation for dividend payments took a battering during 2020.

The coronavirus pandemic caused a global shutdown during the first few months of last year, forcing companies to take widespread, and often drastic, measures to keep operating during a period of uncertainty.

Dividends were an obvious place to start, and according to research carried out by GraniteShares, almost 500 companies listed on the FTSE 100, FTSE 250, and AIM stock markets either cut, cancelled, or suspended their dividend payments during 2020. As a result, the FTSE 100 average dividend yield for 2020 overall ended up at a significantly lower 2.98%.

Which companies were affected?

Some of the biggest dividend payers come from the oil, banking, and property sectors. Within the oil sector, after a year when travel became a non-starter for millions of people, BP cut its dividend by half after reporting a $6.7 billion loss in the second quarter of 2020, while Shell reduced its dividend by two-thirds – the first time it cut its dividend since World War Two. After the shock of 2020, and the increased pressure on oil producers to invest in the transition towards renewable energy, the prospects for a return to past dividend highs looks uncertain for now.

However, a return to normality looks more promising in those two other sectors. Companies operating within the UK banking sector – including HSBC, NatWest, Lloyds, and Barclays – stopped paying dividends in March, following recommendations from their regulator. The concern was that banks needed to keep more capital on hand in order to absorb financial losses from non-payment of loans. This concern appears to have been overstated, and following upbeat reports in the third quarter of 2020, the Bank of England has said banks are cleared to announce dividends as part of their next financial results in 2021.

Within the property sector, companies such as Land Securities and British Land cancelled their dividend pay-outs to conserve cash early during the pandemic, after heightened fears that their tenants would fail to keep up with rent repayments. But both have announced they intend to restart dividend payments in 2021.

What’s likely to happen now?

A return of companies paying dividends would be an important and positive development in 2021, and with banks and property companies expected to return to making payments soon, the signs are encouraging.

That said, expecting a return to previous levels of dividend payments seems optimistic. The coronavirus has made life difficult and even accelerated the decline of companies in certain industries – which is likely to reduce the average dividend yield in the UK market for some time to come. Most companies are likely to start paying dividends at more sensible levels to protect their business in the long run, which is no bad thing.

What should investors be thinking about?

Stocks with a good history of paying consistent and growing dividends will always be appealing to investors. But you should avoid investing for the promise of a dividend alone – it is just one of many factors to bear in mind, and companies can change their dividend policies at short notice, as seen during 2020.

If you hold some UK shares that are there solely for their dividend-paying prospects, now might be a good time to reassess their place in your portfolio, and consider some of the other investment options available to you. For example, the UK is no longer the only place to find great dividend-paying companies. You might be better off switching your investment into a fund that looks at other countries, such as the US, Japan, and the Asia-Pacific region. There are other income-generating investment options available too, so this might be a good time to refresh and refocus your portfolio.

If you are interested in discussing your investment strategy with us, please get in touch with one of our experienced financial planners here.

The value of your investment and income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

Now that 2020 is behind us, everyone is ready for a fresh start. We wanted to share five reasons why 2021 may well be positive for investment markets, and why now’s a good time to get your finances in the best working order.

One: The economic recovery is in sight

Repeated lockdowns during 2020 led to a sharp slowdown in economic activity and as we move into the third national lockdown, the economic uncertainty may well continue in the short term. However, with vaccines being introduced globally in 2021, we expect to see a sharp rebound in economic activity later in the year. But even if activity comes back strongly, that does not necessarily mean companies and markets will benefit. As markets tend to be forward-looking, current equity valuations already now include expectations of the ‘2021 rebound’.

Markets did surprisingly well during 2020, but much of this was due to the support offered by governments and central banks to prevent companies from going under. To make headway from here, investors will want to see that already-expected economic growth clearly translate into company profits. For us, the biggest factor that makes the equity outlook positive is central bank policy. Since government bonds should remain at historically low levels for the foreseeable future, equities have the yield advantage, which means investors will continue to favour buying stocks over bonds. Provided central bankers keep their nerve and continue to offer support (instead of withdrawing it too soon), equity markets should make forward progress, although at a slower rate than in 2020 overall.

Two: Brexit means UK businesses can finally look forward

Regardless of how you voted during the referendum back in June 2016, Brexit has become an unhealthy preoccupation over the past five years, casting a shadow over the economy and UK equity markets. Now we have finally said our goodbyes, at last, there is an end to the constant state of uncertainty that was causing so much damage to British businesses. Clarity on transition conditions will finally allow businesses to plan for the future.

Many investment analysts believe that this uncertainty has been holding British companies back and that from here, things can only get better. UK equities have been so unloved by investors in recent years that it looks hard to justify their lowly relative valuations. Even if UK growth lags behind the rest of the world, there are many good British businesses that will continue to prosper after Brexit, which could see UK stock markets do surprisingly well in 2021. That said, much will depend on the economic policies that the UK decides to pursue. The Bank of England certainly played its part during the worst of the coronavirus pandemic, by lowering interest rates and providing liquidity for markets. But Brexit means more expansionary policies will now be needed.

Three: The US election result has been well received by investors

US investors took heart that a decisive result was determined in the election and that a smooth transition of power is now likely. Whilst some would question policy decisions made by the White House of late, action taken by the US Federal Reserve has been more decisive. As well as setting short-term interest rates at zero and keeping long-term bond rates low through extensive asset purchases, the Fed also used the tools at its disposal to offer emergency funding for companies that saw most of them through the economic shutdown. Even so, the US is by no means out of the woods, so we expect the Fed will stick with a ‘lower for longer’ policy on interest rates, and continue to commit to supportive economic policies, even as growth begins to return. We consider this to be a positive for long term US economic growth, and for investment markets on the whole.

Incoming President Joe Biden will have his work cut out, especially during the early months of his presidency. But environmental policy is one area where Biden could make a real difference, repairing international relationships and accelerating some of the investment trends (around technology, commodities, and energy) that ‘green’ policies demand.

Four: China and the rest of Asia can set the pace

Asian countries in general have suffered less economic damage due to the pandemic, as highlighted by China’s early and substantial return to growth. South Korea and Taiwan also handled the spread of the virus well and have been able to keep economic activity at a level considerably above the US and Europe. It was also helpful for them that both their stock markets are heavy on technology companies that did well on a global basis during lockdown. As a result, the Asia-Pacific region looks well placed to grow strongly in 2021.

Economically speaking, the ingredients are all there for continued Chinese growth. The real difficulty lies in its political relationships with the West. China faced heavy international criticism in 2020 over alleged human rights abuses in Xinjiang and the effective crushing of any democratic rule in Hong Kong. Further acts of aggression could result in sanctions from other nations, which would lead to investors being forced to pull their money out of Chinese companies. A lot will therefore depend on whether Joe Biden can form a stable working relationship with his Chinese counterpart Xi Jinping.

Elsewhere within emerging markets, Latin America, the Middle East, Africa, and the Indian sub-continent face a more complicated picture. In general, a global cyclical rebound with a weaker dollar should be viewed as positive conditions. But much depends on how well governments can continue to contain the spread of the virus, and whether they are able to provide fiscal support without drastically increasing their debt costs.

Five: ESG is now firmly centre stage

One of the biggest positives during 2020 has been the increase in popularity of environmental, social, and governance (ESG) investing. According to the Investment Association, investments made into ESG and sustainable funds quadrupled in 2020, with £7.1 billion invested in the first three quarters of the year compared with £1.9 billion last year.

As well as mounting fears around climate change, the coronavirus has also played a major role in raising awareness among investors, as well as creating a major change in corporate behaviour. Companies have had to re-assess the relationships with their customers, employees, suppliers, and the wider community, instead of just addressing the short-term needs of shareholders. Research by Bank of America Merrill Lynch shows that companies that performed well during the height of the COVID crisis demonstrated superior product, health and safety scores, as well as better workforce policy scores.

After 2020, there’s now an even stronger case to suggest sustainable investment funds offer enormous potential, not solely for the sake of ethical or environmental issues, but because of their ability to invest in companies that manage risks more effectively during times of crisis and do so while delivering more resilient returns. Doing the right thing can be (and should be) a profitable way to do business.

Now is a great time to get your finances in order

It’s understandable to feel apprehensive about what the year ahead might bring. Whatever happens over the coming months, the pandemic is likely to have a lasting impact on our lives and finances. So, now is a good time to reassess and make changes, such as ensuring your savings work harder and protecting the things that matter. One of our qualified financial planners will be able to talk through the options available to you, assess your attitude towards investment risk, and come up with a plan to help you achieve the best possible outcome. There’s really no better time to start than right now.

If you are interested in discussing your financial plan or investment strategy with us, please get in touch with one of our experienced financial planners here.

This content is for information purposes only. It does not constitute investment advice or financial advice.